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Offerings in the Offing

Origami

By

Jack Willoughby

Updated Oct. 18, 1999 12:01 a.m. ET

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W ebster's Third International Dictionary defines origami as the Japanese art or process of paper folding. In America this art has developed a devoted following among the Wall Street underwriters offering stock to the public.

Certainly one of the more original creations of late comes with the IPO of Packaging Corp. of America. On the surface the deal seems plain as a cardboard box: Packaging Corp., based in Lake Forest, Illinois, hopes to raise $750 million at an average price of $17.50 a share next week by selling 42.8 million shares through
Goldman Sachs
. With four mills, 67 converting plants and one million acres of timberland, the company is the sixth-largest producer of container-board and packaged products. Chicago leveraged-buyout firm Madison Dearborn Partners holds majority control with a 53% stake.

But beneath the surface, Packaging Corp. bears the mark of a newly renovated house, mortgaged to the hilt just prior to being put on the market. You can smell the fresh paint. Behind the offering lies a cash-hungry
Tenneco
, a firm whose credit ratings are almost as low as its share price. Potential investors should realize that most of the hoped-for $17.50 a share will go to Tenneco.

Revenues have been flat over the years, while profits have swung this way and that. Packaging Corp. reported net of $71 million on $1.6 billion of sales for 1998, compared with $27 million on $1.4 billion in '97.

The elaborate paper folding behind this deal began in April, when Tenneco sold its corrugated- and packaged-products division to Madison Dearborn for $242 million in cash, plus the assumption of $1.76 billion of debt. In return, Tenneco received a 45% common interest valued at $193 million.

Now Tenneco wants to sell that stake -- up to 41.1 million shares -- in Packaging Corp.'s IPO. One rating agency says it will use the $719 million in proceeds to pay down debt on its specialty-packaging and automobile-parts divisions prior to a tax-free spinoff, expected November 5. So after loading the company up with debt in the first transaction, Tenneco wants investors in the Packaging Corp. IPO to help pay off Tenneco debt. Some deal.

Meanwhile, Packaging Corp. will be saddled with a 70% debt-to-equity ratio and, after the offering, will continue to sport a non-investment-grade double B minus corporate credit rating.

"The Packaging Corp. offering troubles us for a number of reasons," says Sean Egan, founder of Wynnewood, Pennsylvania-based Egan Jones Ratings, a rating agency serving institutional clients. "First, it offers shareholders a minority position alongside a leveraged buyout firm, something we view as dicey. Second, it's a commodity business at the top of the cycle. And third, the leverage is truly formidable with an interest coverage of almost 1-to-1. Lastly, the implied valuation appears to be high, compared with the pro forma 1998 net income of $2.3 million."

Jeffrey Pittsburg, analyst for Pittsburg Institutional in Great Neck, New York, shares those concerns. "I would prefer to own Tenneco shares because of the leverage involved," he says. "If the economy slows down and the paper business slows, they'll have a tough time with the debt."

E xtreme Networks, one of the year's hotter IPOs, plans a secondary offering this week. The company's shares have zoomed from the IPO price of $17 in April to an all-time high of 90 31/32 on Thursday and closed on Friday at 87 1/4 . Chairman Gordon Stitt plans to sell $18 million worth of his personal holdings in the $567 million secondary offering. Postoffering, Stitt will still hold 4.5% of the company, worth $198 million. Norwest Equity Partners also plans to cash out to the tune of $79 million. How about the company itself? If all goes well, Extreme Networks will receive $111 million, or just 20% of the proceeds.

L ast week, this column examined the $2.35 billion offering for CNOOC Ltd., a subsidiary of the China National Offshore Oil Corp. CNOOC, which is owned by the People's Republic of China, oversees that nation's lucrative offshore oil drilling deals. We weren't the only ones who were skeptical, it seems. On Wednesday, underwriter Salomon Smith Barney reduced the asking price from $23.50 per American depositary share to $18. On Thursday, the deal was pulled.

M eanwhile, EPCOS, a former joint venture between
Matsushita Electric
and
Siemens
, priced Friday at $33.41, better than the average asking price of $32.45. Last week we noted that the proposed offering looked relatively cheap. EPCOS finished the day at 38.

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